In Nedschroef Detroit Corp. et al. v. Bemas Enterprises et al., the U.S. Court of Appeals for the Sixth Circuit recently affirmed an award of nearly $3.7 million in damages against two individuals found to have engaged in misconduct related to the operation of a business which competed with their employer.

Nedschroef Detroit Corporation (“Nedschroef”) services and provides replacement parts for fastener machines made by an affiliate in Europe.  Without Nedschroef’s knowledge, two of its employees formed a business – under their wives’ names – to do exactly what Nedschroef did.

After Nedschroef learned about this, it fired the two individuals and then filed suit against them and their competitive business.  The District Court granted summary judgment to Nedschroef on nine counts: breach of the duty of loyalty, breach of fiduciary duty and misappropriation of corporate opportunities, violation of the Michigan Uniform Trade Secrets Act, conversion, statutory conversion, unfair competition, tortious interference, unjust enrichment, and civil conspiracy.  The District Court also awarded $3.7 million in damages and permanently enjoined the defendants from providing replacement parts or services for these machines in North America.

On appeal, the defendants argued that they did not actually compete with Nedschroef, because they only provided parts and/or services to customers who had “previously requested a quote for the same part or service from Nedschroef” — but who had rejected Nedschroef’s quote.  The Sixth Circuit did not find this convincing, holding that the argument “ignor[ed] both common sense and the undisputed evidence in the case.”

On appeal, the defendants also challenged the District Court’s finding that they had misappropriated Nedschroef’s proprietary secrets.  However, the Sixth Circuit found no error in the District Court’s finding that the defendants obtained Nedschroef’s proprietary secrets through breach of a duty to maintain their secrecy, and “then used those drawings to manufacture and sell parts in direct competition with Nedschroef.”

Although the size of the award in this case is eye-catching, the controlling legal principles are well-established: barring a contractual limitation, an employee is generally free to take limited steps to prepare to compete with his employer, but he cannot actually compete while still employed, and he can never do so using his employer’s trade secrets or confidential information.